I think it would be absolutely fair for the rating agencies to downgrade US debt if the suicide caucus blows the brains out of the US economy by failing to raise the debt ceiling. The debt ceiling has to be raised, plain and simple. But once rating agencies start dictating the terms of what has to go into raising the debt ceiling, they are crossing an invisible line.
Aside for the possibility of a massive failure on the part of the political system, there appears to be little chance of the US failing to pay off its outstanding debt in the short and medium run. Because of the debt crisis in Europe there is a flight to safety that is driving up demand for US debt and driving down interest rates. The markets are clearly confident that the US is still the safest investment on the block, which begs the question, what exactly does S&P see that the rest of the market doesn't? I might not be Serious enough to see it, but the Kings of the Universe on Wall Street don't see it either. What gives?
If America continues to run massive deficits during a time of full employment, maybe S&P would be onto something. But we are at 9.2% unemployment, so a great deal of the deficit we are currently running is because we are way under full employment. If and when we get back to full employment then the rating agencies and the politicians can start squawking about long-term debt reduction. Until then, can we do something about jobs please?
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